Coordinating Inventory Control and Pricing Strategies for Perishable Products

We analyze a joint pricing and inventory control problem for a perishable product with a fixed lifetime over a finite horizon. In each period, demand depends on the price of the current period plus an additive random term. Inventories can be intentionally disposed of and those that reach their lifetime have to be disposed of. The objective is to find a joint pricing, ordering, and disposal policy so as to maximize the total expected discounted profit over the planning horizon taking into account linear ordering cost, inventory holding and backlogging or lost-sales penalty cost and disposal cost. Employing the concept of L-concavity, we show some monotonicity properties of the optimal policies. Our results shed new light on perishable inventory management, and our approach provides a significantly simpler proof of a classical structural result in the literature. Moreover, we identify bounds on the optimal order-up-to levels and develop an effective heuristic policy. Numerical results show that our heuristic policy performs well in both stationary and nonstationary settings. Finally, we show that our approach also applies to models with random lifetimes and inventory rationing models with multiple demand classes.